Globalization is only getting more powerful, according to PGIM research, despite high-profile trade barriers, fights over immigration, and populist movements.
“Nationalism is a response to globalization, whether because of perceptions that the middle classes in emerging markets are gaining at the expense of the middle classes in the developed world, or the possibility that cyber risks are stemming from emerging markets,” Taimur Hyat, chief strategy officer of PGIM, Prudential Financial’s global investment management business, told II. “But if you look at global supply chains linking countries together and other measures, they are all at high water marks.” For example, 40 percent of the revenues of firms in the Standard & Poor’s 500 and the MSCI Europe index come from outside the companies’ home markets.
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In a report to be released later this week called “The End of Sovereignty?”, PGIM argued that the relentless march of globalization, combined with a populist backlash against it in developed markets such as the U.S. and the U.K., should push institutional investors to take a number of actions.
First, investors need to analyze multinationals, central banks, regulators, corporate and sovereign debt issuers, and city administrators, rather than simply looking at country-level factors. “Sectors and companies actually drive returns in emerging markets more than countries,” said Hyat, the report’s principal author. “The country as a unit of analysis for investors is less relevant.” PGIM has used data from QMA, its quantitative manager, to test its thesis in equities. But the same is apparently true in fixed income. “Look at corporate debt, it’s less linked to how the sovereign is doing. In real estate, cities matter more than countries. Silicon Valley is more similar to Bangalore than Montana,” he continued.
PGIM also recommended that investors look at portfolios from a global perspective, because of a phenomenon it calls cross-country spillover. For one, a significant portion of the revenue of a company comes from beyond its home country’s borders. “At the security selection-level, investors should broaden the analytical lens to understand, for example, how companies might benefit from globalization (e.g. global, quasi-monopolies in the technology sector) or withstand regulatory backlash by a sovereign actor,” according to the report.
This is hardly the first tug-of-war between nationalism and globalism. And with that struggle, comes volatility, PGIM noted. “That’s what we’re seeing now. These things don’t end well. There is a schism, a real uncertainty,” said Hyat. “Globalization is a long-term secular winner, but the near-term tussle between these forces could lead to a lot of volatility and that has to be front of mind for investors,” he added.
Perhaps counterintuitively, PGIM wrote that in the current environment asset owners and corporations need to be prepared to take public positions on big issues such as climate change and gender equality.
“This role is not comfortable for many investors who traditionally focus on fiduciary duties above all. However, plan participants, non-profit advocacy groups, the press, and board members will increasingly expect CIOs to communicate their position on global issues — such as climate change, biodiversity, international labor standards, and gender equality. They will also expect CIOs to demonstrate leadership through corporate engagement and asset allocation decisions that advance the position,” according to the report.
“Multi-national corporations are as much agents of change as a nation state,” Hyat said.